Rectangles - Long Trading Strategy with CFDs

By Jeff Cartridge

The rectangle can be traded very successfully on the long side entering the trade as the stock breaks out to the upside. The pattern forms when the two boundary lines that contain the price movement are parallel. The bottom line and the top line are both near to horizontal. Sometimes these may be called a channel or a consolidation, but the most famous version of this pattern was a variation by Nicolas Darvas, published in his book ?How I Made $2 million in the Stock Market?.

Rectangles, Unpredictable But Profitable

Rectangle breakouts show a slight bias to the upside with patterns breaking up 54% of the time. This upward bias is likely due to the overall bullish bias of the market as the symmetrical nature of the pattern does not clearly indicate a breakout direction. The breakout of rectangles can deliver strong returns with 56% of the patterns being profitable. The average return for the long trades is 1.15% in 12 days.

Refine Your Entries

When you look at the performance of a rectangle the pattern works better when the market is rising. Trading rectangles when the market is in an up trend or consolidating improves your trading results. If the sector and the stock are consolidating or rising this also improves the performance of the pattern.

Rectangles are sensitive to the length of the pattern with breakouts that occur between 10 and 35 days, from the start of the pattern, performing the best. While the pattern breakout works best in the range specified, it is not important if the pattern breakout is early or late in the pattern.

Volume is important with rectangles ensure that the volume is supportive of the breakout with the volume as the share rises more than volume as the share falls. Avoid patterns that have lower highs prior to the breakout or the last turning point is formed by a single outside candle.

Trading Rectangles Can Be Very Profitable

You can improve your trading results by using a series of simple filters that have been outlined here. This select group of rectangles delivers an average profit of 1.89% in 13 days and is profitable on a very high 71% of the trades. Overall this makes rectangles attractive to trade.

Note: Statistics for this article have been provided by Patterns Trader after analyzing over 60,000 chart patterns on the Australian market from 2000 - 2008. - 23196

About the Author:

Jeff Cartridge has been trading CFDs since 2002 and created the website LearnCFDs.com A Simple Timeless Method for Huge Gains